Governance of the Treasury FunctionCIPFA Scottish Treasury Management ForumAlan George, Regional Director23rd February 2012

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Governance and Accountability

Definition of Corporate Governance

“The system by which organisations are

directed and controlled”

Cadbury Report 1992

Key Principles of Corporate Governance:

Openness

Integrity

Accountability

Corporate Governance

To comply with key principles, Authorities need to consider

Organisational structures and processes

Financial reporting and internal controls

Standards of behaviour

Code of Conduct

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Delivering good governance in Local Government (CIPFA / SOLACE)

Consider the effectiveness of the Authority’s risk management arrangements and the control environment

Seek assurance that action is being taken on risk-related issues identified by auditors and inspectors

Be satisfied that the authority’s assurance statements properly reflect the risk environment and any actions required to improve it

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Delivering good governance in Local Government (CIPFA / SOLACE)

Approve (but not direct) the Internal Audit Strategy and monitor performance

Review summary Internal Audit reports, and seek assurance that appropriate action has been taken

Receive the annual report of the Head of Internal Audit

Consider the reports of external audit and inspections

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Definition of Treasury Management

The Management of the organisation’s...

Investments

Cash flows

Banking

Money market and capital market transactions Effective control of the RISKS associated with those activitiesPursuit of optimum performance consistent with those RISKS

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Key Drivers

Treasury Management

Legislation

CIPFA’s Codes of Practice

Strategic Documents

Capital Expenditure

Plans

Risk Appetite

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Strategic Considerations

Balance Sheet Position

Budget Pressures

Security of Capital

Budget Profiling – Capital and

Revenue

Capital Programme

Deliverability of Schemes

Slippage etc

Capital Receipts

Cash Flow Management

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Treasury Risk ManagementCredit and Counterparty

risk Liquidity risk

Interest Rate risk Exchange Rate risk

Refinancing risk Legal & Regulatory risk

Fraud, error, corruption and contingency

management

Market value of investments

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TM Risk Management

“the ongoing activity of adjusting the authority’s treasury exposure due to changing market and domestic circumstances in order to manage risk and achieve better value in relation to the authority’s objectives”

o Doing nothing does not avoid or minimise risk

o Risk can be failure to take advantage of opportunities

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Balance Sheet

o Year end o Level of Reserves and Balanceso Cash Positiono Capital Financing Requirement (CFR) o External Borrowingo Internal Borrowing

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Council Balance Sheet

• Reserves & Balances = £145m GF Balances = £15m HRA Balances = £10m Earmarked Reserves = £65m Capital Grants etc = £40m Provisions = £15m

• Working capital surplus = £ 15m• Total reserves & balances = £160m• Investments = £ 95m• Internal Investments = £ 65m

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Key Balance Sheet issues

• Capital Financing Requirement = £370m • External Borrowing = £305m• Under borrowed = £ 65m

• Internal Investments = £ 65m

• Capex over next 3 years = £215m

• CFR Forecasts = £392m (11/12)= £398m (12/13)= £390m (13/14)

Risk Management

1. Risk management is the identification and assessing of the risks to which an organisation may be exposed

2. Assigning ownership of risks to specific individuals to manage

3. The mitigation of those risks by implementing suitable control and management measures

4. The acceptance of the residual risks as being risks worth running

5. Periodic monitoring and reviewing of risks and risk management

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TM Code of Practice – summaryo Responsibility for Risk Management lies with the

organisationo Enhanced member involvement and understandingo Better Scrutinyo Trainingo Reporting requirements – Quarterly / Half Yearlyo Reliance on Credit Ratingso Diversificationo Monitoring of Indicatorso Borrowing in advance – clear business case in place

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Why is a Code needed?• To reflect Audit Commission’s report and

findings• CLG and Treasury Select Committee review• Credit Crunch and Impact on banking system• Risk appetite• Increase in risk exposure• To maintain high and consistent standards in

looking after public funds for all Local Authorities, Police Authorities etc

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The Code’s four clauses:• Formal adoption of the “Four Clauses”

o Clause 1 - Policies and Practiceso Clause 2 - Reporting Requirementso Clause 3 - Delegationo Clause 4 - Scrutiny

• Make the “Four Clauses” part of standing orders and financial regulations

Clause 3: Delegation of responsibility for treasury management to: -

• Cabinet / Committee / Council for implementing and monitoring the TMPS & TMPs

• The responsible officer (S95) – for the execution & administration of TM decisions in accordance with the TMPS and TMPs

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Clause 4: Scrutiny

The following body or group of individuals is nominated to be responsible for ensuring effective scrutiny of the TM strategy and polices:

Scrutiny Panel Governance Committee Audit & Governance Committee

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Treasury Management Strategy Statement

Debt and investment portfolios:–

o Interest rate forecasto Prudential and Treasury Management Indicatorso Explanation of gross v. net debt o Policy on borrowing in advance of needo Policy on use of external service providerso Any extraordinary issues

The Financial Control Environment

Sound decision making framework

Sound systems and procedures

Chief Finance Officer – s.95 - ensuring adequate accounting records and expenditure is within affordable limits

Financial Regulations, Financial Plans and Strategies

Medium Term Financial Plan (MTFP) and Annual Budgets

Internal and External Audit

Audit Committee

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CIPFA guidance for Local Authorities:o The Audit Committee (Corporate Governance

Committee) is a critical component in the overall corporate governance process

o It should be independent from the executive and scrutiny functions

o It should provide assurance to elected members and members of the public that systems on internal control are effective

o It should provide assurance about the organisation’s arrangements for managing risks

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Treasury Management Practices• TMP 1 Treasury risk management• TMP 2 Performance measurement• TMP 3 Decision - making and analysis• TMP 4 Approved instruments, methods and techniques• TMP 5 Organisation, clarity and segregation of responsibilities

& dealing arrangements• TMP 6 Reporting requirements and management information

arrangements• TMP 7 Budgeting, accounting and audit arrangements• TMP 8 Cash and cash flow management• TMP 9 Money laundering• TMP 10 Training and qualifications• TMP 11 Use of external service providers• TMP 12 Corporate governance